Falling Crypto Value Does Not Equal Crypto Tax Deduction | Foodman CPAs and Advisors

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With tax season in full swing, many taxpayers are investigating the possibility of claiming a crypto tax deduction on their “devalued” crypto assets. Taxpayers should refer to the IRS Chief Counsel’s Opinion Memorandum Number: 202302011 dated 01/13/2023 for further clarity. The memorandum responds to specific advice from non-taxpayers regarding the applicability of Section 165 of the Internal Revenue Code. It should be noted that the memorandum states that the document should not be used or cited as a precedent.

What is the problem to be solved?

Section 165 of the Internal Revenue Code provides for the deduction of losses incurred during the tax year (not offset by insurance or otherwise). If a Taxpayer owns cryptocurrency that has significantly diminished in value, has Taxpayer A suffered a loss under Section 165 of the Code due to the cryptocurrency becoming useless or abandoned? currency ?

The short answer is No

The memorandum states that Section 165 provides a deduction for losses that are evidenced by:

closed and completed transactions fixed by identifiable events, actually, suffered during the tax year

Reasoning

The memorandum indicates that the taxpayer with the problem in question mentioned above (cryptocurrency whose value has decreased significantly) has not abandoned or otherwise disposed of the cryptocurrency, and the cryptocurrency is not without value because it still has value. Therefore, a Taxpayer has not suffered a loss under section 165 and the corresponding regulations. Additionally, even if a taxpayer were to incur a loss under section 165, the loss would be denied because section 67(g) suspends various itemized deductions for the 2018 through 2025 tax years.

Highlights of the discussion in the memorandum

Sales, exchanges and other disposals of digital assets may result in the recognition of a gain or a loss. The nature of a gain or loss from the disposition of cryptocurrency generally depends on whether or not the property is capital property in the hands of the taxpayer. A taxpayer who is not in the trading or business of trading cryptocurrency will generally realize a capital gain or loss on the sale or exchange of cryptocurrency. A taxpayer realizes an ordinary gain or loss on the sale or exchange of property that is not held as capital property. Section 165(g) provides that if a security which is capital property becomes worthless during the tax year, the loss is to be treated as a loss from the sale or exchange of capital property . Section 165(g)(2) defines a security as a share of stock in a corporation; a right to subscribe for or receive a share of shares in a company; or a bond, debenture, note or certificate, or other evidence of indebtedness, issued by a corporation or government or political subdivision thereof, with interest coupons or in registered form. Cryptocurrency is none of the items listed in Section 165(g)(2), and therefore Section 165(g) does not apply. For individual taxpayers, section 67(b)(3) characterizes section 165(a) losses, other than those resulting from accidents, theft and betting, as miscellaneous itemized deductions. Under current law, section 67(g) prohibits all miscellaneous itemized deductions for tax years beginning after December 31, 2017 and before January 1, 2026.

Clarity on Worthless Cryptocurrency

For cryptocurrency whose value has decreased significantly; however, its value was greater than zero, it continued to be traded on at least one cryptocurrency exchange, and a taxpayer did not sell, trade, or otherwise dispose of the cryptocurrency units: “The mere decrease in the value of the property does not create a deductible loss An economic loss in the value of a property must be determined by the permanent closing of a transaction relating to the property A decrease in value must be accompanied by an affirmative measure that sets the amount of loss, such as surrender, sale, or trade Meaning: in a case where each unit of cryptocurrency had a net asset value, although it was valued at less than one cent at the end of 2022, the cryptocurrency continued to be traded on at least one cryptocurrency exchange, allowing the possibility that it could increase in value in the future.As a result, the cryptocurrency was not totally worthless in 2022 due to its declining value eur, and a taxpayer will not suffer a loss of good faith under section 165(a) in 2022 due to its worthlessness.

Clarity on discontinued cryptocurrency

Abandonment is proven by an assessment of the surrounding facts and circumstances, which must show: (1) an intention to abandon the property, coupled with (2) an affirmative act of abandonment.

Under section 165, a taxpayer suffers a loss under section 165(a) for the obsolescence or loss of usefulness of non-depreciable property if:

the loss is incurred in a business or transaction entered into for profit; the loss results from the sudden cessation of usefulness in the business or transaction; and the property is permanently disposed of or the transaction is terminated.

If a taxpayer took no action to abandon and permanently dispose of the taxpayer’s cryptocurrency units in 2022, the taxpayer retained ownership of the cryptocurrency until the end of 2022, even if the value of each unit of the cryptocurrency at the end of the year was less than a penny. Therefore, the Taxpayer has continued to exercise dominance and control over the cryptocurrency and, regardless of intent, has not taken any affirmative action to relinquish ownership in 2022. Therefore, the Taxpayer has not not suffer a loss pursuant to section 165(a) in 2022 due to abandonment. .

know this

It is best to consult your Crypto tax advisor when filing 2022 taxes to claim any crypto tax deductions.

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